Microsoft’s $10 Billion Bet Turns Heads

November 2022 marks an inflection point for humanity.

Artificial intelligence took a leap forward when OpenAI and its ChatGPT took generative AI mainstream.

Everyday users could now see and experiment with a live model capable of miraculous drawings and answers, all done in regular parlance.

No fancy coding skills required.

Microsoft (MSFT) didn’t waste any time and plunked down a hefty $10 billion investment in OpenAI.

It was a bold move that could pay huge dividends in the future.

Ever since financial pros look up the MSFT ticker at a record pace, according to our Trackstar data.

Could this really change everything for a company the size of Microsoft?

Yes, and here’s why.

Microsoft’s Generative AI Business

Generative AI is a fancy name for a model that allows users to interact by speaking normally.

The model can infer quite a bit, including intent, context, and much more. When it responds, it does so in a natural human way.

Here’s an example we asked the Bing search engine:

Anyone with a Microsoft account access this feature through the ‘Chat’ function on the Bing search engine.

Companies have already begun replacing writing staff with AI, automating processes, and creating content and unique art in a way like never before.

Now, Google (GOOGL) tossed out its Bard model. While it’s not bad, it isn’t as well-rounded and useful as Bing’s OpenAI model.

This could change the way everyone searches the internet.

Think about it.

For the last quarter of a century, searching the internet was synonymous with ‘Googling’ something, much like you blew your nose with a Kleenex.

And that’s why financial pros keep looking up Microsoft.

Despite its premium valuation, it’s entirely possible that Google’s stranglehold on search will evaporate.

Can you picture Microsoft’s market cap if they stole a huge chunk of Google’s search and advertising business?

Financials

Source: Stock Analysis

Microsoft is a massive company that just keeps getting bigger.

It’s the second-largest company by market capitalization, just behind Apple. Google is #4.

Never satisfied with mediocrity, management has pushed Microsoft to its highest margins in years.

The company generates a ridiculous +$80 billion in operating cash flow per year and $43 billion in free cash flow with more cash on hand than total debt.

That means they have the money and the means to invest in their future.

Valuation

Source: Seeking Alpha

We won’t sit here and tell you MSFT is a cheap stock. But relative to its peers, it’s not that bad.

Probably the worst metric is its price-to-cash flow, which is more than double Meta’s (META) and about 50% greater than Google’s. Interestingly, it’s only a bit higher than Adobe’s (ADBE).

Growth

Source: Seeking Alpha

Smaller companies like c3.AI (AI) can and do grow sales at a much faster clip. However, they aren’t much better than Microsoft’s over the last few years.

And amongst its peers, Microsoft was the only one to grow EBITDA YOY save for Adobe.

Profitability

Source: Seeking Alpha

Now, Microsoft won’t ever deliver the gross margins of its peers simply because of the verticals it serves.

But its net income is leaps and bounds above others and should expand going forward.

Our Opinion 8/10

It’s hard not to be bullish on Microsoft. There are so many great things go for the company.

Our only issue is price, which can easily be rectified by a decent pullback.

Anything around $280 would be a great spot to start a position.